Municipal bonds and related exchange traded funds have enticed investors with their tax-exempt status on the income they provide. Now with the so-called fiscal cliff threatening broad tax hikes, some speculate that munis could lose their favorable tax treatment. However, it's unlikely this would happen.
Congress always seems to revisit the municipal bond tax-exempt status whenever a budget bill deadline comes up but nothing usually comes of it, reports Benjamin Shepherd of Personal Finance for Minyanville.
Shepherd argues that revoking the tax-exempt status would not raise enough revenue to make a dent. Most believe that the removal would only generate an extra $50 billion a year.
Meanwhile, if the tax-exempt status is thrown out, state and local governments would suffer with higher borrowing costs. Investors are only willing to invest in municipals at their current rates because of the tax advantages. However, if the tax status were revised, investors would require higher rates on the investments to make it worth their while.
Additionally, the majority of municipal bond holders are from households making less than $200,000 a year, according to the Internal Revenue Service. So, the Obama administration's plan to help the middle-income earners would not pan out so well if Congress were to revise munis' tax status.
High-yield municipal bond ETF options include:
- Market Vectors High Yield Municipal Index ETF (NYSEARCA:HYD): 4.28% 30-day SEC yield
- SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA:HYMB): 4.18% 30-day SEC yield
Broad municipal bond ETFs include:
- iShares S&P National Municipal Bond Fund ETF (NYSEARCA:MUB): 1.54% 30-day SEC yield
- SPDR Barclays Capital Municipal Bond ETF (NYSEARCA:TFI): 1.51% 30-day SEC yield
Max Chen contributed to this article.